Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 How Does Mandatory IFRS Convergence Impact on Foreign Investment? Evidence from Taiwan Chung-Hao Hsu* and Syou-Ching Lai** Based on broadly verified benefits of financial statements comparability, we examines whether mandatory convergence strategy before adoption of International Financial Reporting Standards (IFRS) in a unique country, Taiwan, increases foreign mutual fund investment in its common stock at firm level. We find that, on average, foreign investment increases for firms that affected by the phased strategy and for firms with larger net assets cumulative difference between new IFRS-based standards and local GAAP-based standards, after controlling for year-fixed and industry-fixed effect. We also find that foreign investment funds, but not amounts, increase by larger net income cumulative difference. We further partition it by individual new accounting standard in the convergence period and find that some of the difference can separately result in more increasing investment of foreign mutual fund. Overall, compared with domestic investors, our results indicate that a common set of global accounting standards matters for foreign investors. The sophisticated foreign investors consider the cumulative amount and the recurrence of separate IFRS-based standard respectively and simultaneously to be the key factor in making investments, even on convergence stage. JEL Codes: M40, M41, G15, G18 and G23 Keywords: Convergence; International Financial Reporting Standards; Foreign Investment; Mutual Fund Data Availability: Data are publicly available. * Mr. Chung-Hao Hsu, Department of Accountancy, National Cheng kung University, Taiwan, ROC. Email: r1897102@mail.ncku.edu.tw ** Associate Prof. Syou-Ching Lai, Department of Accounting and Information System, Chung Jung Christian University, Taiwan, ROC. Email: sclai@mail.cjcu.edu.tw 1 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 1. Introduction Differences between accounting standards across borders are perplexed question for a long time. That is often cited as an important factor affecting the information acquiring and processing costs of foreign investors who wish to diversify globally. The foreign investors must make efforts to understand multiple sets of accounting standards in order to compare companies in different countries. Between countries with a common set of accounting standards can provide comparability benefits to users of financial statements (Hail et al. 2009). Investors’ propensity to overweight domestic stocks, underweight foreign stocks in another word, in their common stock portfolios is generally referred to as home bias, a well-established empirical regularity. Besides trade restrictions upon foreign investors, a common explanation is an informational disadvantage when investing in foreign markets with poor information disclosure. It is more expensive for foreign investors, compared to domestic investors, to obtain relevant information about firms in non-home markets, especially when accounting standards differ. The U.S. Securities and Exchange Commission(SEC) and the financial Accounting Standards Board(FASB) have been working with their international counterparts on convergence efforts to develop high quality, internationally comparable financial information that investors find useful for decision making in global capital markets(SEC, 2008; Financial Accounting Foundation, 2009). The convergence efforts have focused on coordinating standard setting and reducing differences in accounting standards. To this end, the FASB and International Accounting Standards committee(IASB) are working to achieve the standard-setting milestones specified in their Memorandum of Understanding (FASB and IASB, 2008) with a goal of developing a single set of high quality accounting standards. In 2011, the US SEC supplemented its Roadmap by outlining a possible framework for incorporating IFRS into the US financial reporting system that combine elements of convergence and endorsement (SEC, 2011). Convergence between IFRS and US Generally Accepted Accounting Standards (GAAP) has increased over time (FASB and IASB, 2008), and the use of IFRS has become more widespread thereby increasing investor 2 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 understanding and more consistent application and enforcement. The efforts to converge accounting standards, the increasing mandatory use of IFRS throughout the world, the development of international auditing standards have increased comparability of accounting amounts. This paper is to test whether the impact of IFRS convergence strategy on foreign stock investment exists in a unique country, Taiwan, and is still identical to what prior researches did around IFRS adoption concludes in a multinational situation. The fundamental setting of our research is before mandatory IFRS adoption and in a single country. Only in this way, we can further investigate whether IFRS policy still have impact on foreign investment before adoption. If so, how the importance and comparability of new standards for IFRS convergence can have distinguished influence on foreign investors. Taiwan, a considerable component in the world capital market, could be one of the biggest countries that ever employ official convergence strategy (Bae, Tan and Welker 2008). What we can observe about convergence policy is obviously less than about adoption because the convergence is in a longer time span and is employed by less country. Taiwan is a unique one with relative clear cuts of intensive convergence. It has a determinable four-year convergence period so that we can easier examine what’s the effect of the IFRS convergence on stock investment. Our results indicate that foreign investment increases for firms that affected in IFRS convergence mainly at firm-level and partially at standard-level, after controlling for year-fixed and industry-fixed effects. We include and control for all firms-level characteristics, such as firm’s information environment, visibility to investors, trading environment, the credibility of the accounting numbers, the financial characteristics that may impact the investment preferences of mutual fund managers. While our results do not directly test whether mandated IFRS use is decision-useful in the sense that it directly affects market measures, we provide strong evidence that investment outcomes, i.e., overall foreign investment toward a country, are affected by mandated IFRS convergence. Evidence that foreign investment is positively associated with IFRS use in other countries provides support that global accounting convergence benefits foreign investors. An advantage of using a sample of firms in one unique country is that it 3 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 inherently controls for the various characteristics of firms in different countries. At the same time, it controls for investing preferences that obviously vary between investors. Overall, our study complements the concurrent studies by providing evidence consistent with the view that a common set of global accounting standards matters for portfolio holdings of foreign investors not just after adoption but upon convergence, not just in an multinational situation but in a unique country, not just the environment and enforcement of standards, but the importance and comparability of separate standard. Overall, we add to the growing literature studying the economic consequences of international accounting on asset allocation decisions. Using different research designs and various data sources, several concurrent studies (e.g., Amiram 2009; DeFond et al. 2011; Florou and Pope 2009; Gordon and Shima 2010; Yu 2010) find that cross-border holdings increase in the year of mandatory IFRS adoption. In this paper, we use aggregated data and focus on Taiwan’s foreign investors to investigate the effect of mandatory IFRS convergence on the foreign investor allocation decisions toward Taiwan. This paper proceeds as follows. In the second section, we provide background information on foreign investment and IFRS convergence and develop our hypothesis. The third section presents our sample and research design, and the fourth section presents our results. The fifth section concludes the paper. 2. Literature Review and Hypotheses 2.1 Taiwan IFRS Convergence The purpose of this paper is to investigate whether mandatory convergence strategy of International financial Reporting Standards (IFRS hereafter) at the firm level can attract foreign mutual fund investments in a unique country. As many countries converge toward IFRS one way or another in recent years by integrating IFRS solutions into domestic GAAP or by wholesale adoptions of individual IFRS standards. What situation our research in is the official convergence strategies, that is, cases where local regulators officially announce a gradual move towards IFRS over a predetermined time frame. In order to converge into IFRS, Taiwan’s FASB, founded by Accounting 4 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 Research and Development Fund, formulated and promulgated new IFRS-based financial accounting standards since 1999. From that time Taiwan’s financial accounting standards gradually increase the new IAS/IFRS-based standards. However, until the pronouncement of No.35 Impairment of Assets on 2004 July, there are fewer new important standards phased in. Moreover, until the announcement of direct use policy on 2009 May, there are eight new important standards from 2005 phased in including impairment of assets, intangible assets, inventory, financial instruments, payments for directors and executives, share-based payment, and non-current assets held for sale and operating segments. There is a very intensive change in 2004-2008 Taiwan. Therefore, we can collect the difference data from 2005. Figure 1: The Timeline of Taiwan IFRS Convergence Pre Convergence On Convergence Post Convergence Taiwan GAAP coupled with 8 No new IFRS-based new IFRS-based standards used Standard used Adoption Conversion D Direct Use Taiwan GAAP ~ 2004 2005 ~ 2008 2009 ~ 2011 Dual system IF IFRS standards 2012 2013 ~ 2.2 Hypothesis Development Prior research suggests that a major factor explaining home bias is the high costs of obtaining information about foreign investments (Kang and Stulz 1997, Ahearne, Griever, and Warnock 2004, Chan, Covrig, and Ng 2005). Information in a more familiar form is expected to reduce investors’ information processing costs (Bradshaw, Bushee, and Miller 2004). As noted above, international mutual funds are an important subset of investors because they represent a large subset of global financial investors (Khorana, Servaes, and Tufano 2005); and, as sophisticated investors, they are most likely to base their investment decisions on detailed analyses of financial statements (Bradshaw, Bushee, and Miller 2004). Recent researches using annual reports released document that IFRS facilitate comparisons across firms. Most of the related researches base them on cross-border investigation and analyze the differences around the IFRS adoption. The researches on the effects of FIRS always compile their sample with an adoption year determined. For example, most of countries, like E.U., adopt IFRS in 2005, Hong Kong, Singapore, and Philippines, adopt in 2006 5 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 (Vicentiu et al. 2007, Khurana and Michas 2011). The researches indeed compare the economic consequence of convergence and adoption all countries together, and generally it proves that adoption compared with ‘convergence’ means a lot to investors. However, the degree of convergence is quite different between countries. None of them tells us whether the effect on foreign investment will change by the degree of convergence before adoption in a unique country. Moreover, it’s difficult to measure the degree of convergence by the various standards. It is also necessary to distinguish the policy between convergence with and convergence to IFRS in a unique country. The former generally set a conversion period and a future year for direct use, but the latter not. Consistent with this conjecture, Barth et al. (2011) provide evidence that accounting amounts generated under IFRS are more comparable with U.S. GAAP than those prepared under various domestic accounting standards. As a result, foreign investors will likely direct more capital toward countries that mandate the adoption of IFRS compared to countries that do not, given these increased comparability benefits. In other words, the mandatory adoption of IFRS by firms in Taiwan stock markets can increase foreign investors’ preference. Similar to their paper testing the comparative benefits on IFRS adoption, our hypothesis is made to test the foreign investor’s comparative benefits on IFRS convergence. Hypothesis 1: Firms affected more by the new standards under IFRS convergence strategy experience higher foreign ownership. Yu (2010) uses security-level holdings data of international mutual funds in 39 countries, and she finds an increase in international mutual fund holdings around IFRS adoption. She also finds that the benefit is greater when there are greater differences between IFRS and domestic GAAP and when there is greater enforcement. This research has critical implications for our study that the amount of differences between standards can attract foreign investors in a unique country. As the difference is greater, the original domestic GAAP employed can be more incomparable with other, the original domestic standards can be used much more than other. To sum up, a larger difference means the original standard (or local GAAP) should be either unique or important to a firm or industry. Therefore, when a unique and important 6 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 standard converge into a uniform one, the effects represents the greater benefit of comparability and familiarity. This concept is not only fit for a country but for a unique firm, even a single standard. Hypothesis 2: Firms affected by a new standard with more cumulative difference under IFRS convergence strategy experience higher foreign ownership. The IASB identified the qualitative characteristics of accounting information that distinguish better information from inferior information for decision-making purposes. We further utilize the relevance qualitative characteristics to examine whether comparability benefits foreign investors through enhancing predictive value and confirmatory value. We use recurrence and itemization as proxy for the former, and execute a change model regression for the latter. The result that recurrence is pronounced alone and intercourse with the difference amounts reveals investors regard predictive value of financial reporting comparability decisive. The consistent result of the change model regression explains the confirmatory value of comparability is also important. According to prior multinational researches, when IFRS is credibly implemented and increasing in uniformity, IFRS adoption improves comparability as expected. These two measures are much concerning about faithful representation, completeness and neutrality. However, no research explicitly elaborates the factors influence investors’ decision making, relevance, feedback value and predictive value. Figure 2: Conceptual Framework for Financial Reporting 2010 Approved by IASB Relevant information is capable of making a difference to a financial statement 7 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 user’s decisions. Relevant information has predictive value, i.e. it helps users to evaluate the potential effects of past, present, or future transactions or other events on future cash flows, and confirmatory value, in other words, it helps to confirm or revise their previous evaluations. In our context, it implicates that mandatory IFRS convergence in a unique firm can also apparently reduce the costs incurred by foreign investors in understanding multiple sets of accounting standards. The last, the amount of difference between one new standard of recurring item, like employee benefits and inventory, and its old one can be linked to foreign investors’ interest. The recurring items have greater future cumulative effect than the nonrecurring items, like those available for sale assets and long-term assets impairment. The dollar amount of standard’s difference reflects the quantitative importance of an item, while the discrimination of recurring items distinguishes the qualitative importance of an item. These two kinds of importance will be integrated all together into foreign investment decision. Based on the above arguments, we expect IFRS convergence and adoption to increase cross-border investment in IFRS users. Therefore, we hypothesize the following (in alternative form): Hypothesis 3: Firms affected by a new standard highly recurring or more itemized under IFRS convergence strategy experience higher foreign ownership. 3. Methodology and Research Design 3.1 Sample The holdings of Taiwan securities by mutual fund investors is drawn from the reports on the holdings of overseas and foreign Investments published by an official site of the Taiwan Security Exchange, named as Market Observation Post System, and checked with the Taiwan Economic Journal (TEJ) database. Our full sample consists of 1,505 firms and a total 10,209 firm-year observations affected from 2005 to 2012. We define the cumulative effects of new IFRS-based convergence as two categories. NI denotes the new standards create net income-related cumulative effect in a year. While NW denotes the new standards create net assets-related (or net worth-related) cumulative effect in a year. We use the lead-year cumulative difference to avoid 8 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 the potentially confounding effects in the transition year. Our additional analysis includes a benchmark sample of 2,589 firm-year observations over the period. We collect financial analysts following from TEJ expertise database, the securities firm financial forecast database, in order to replace the I/B/E/S financial analysts following used by extant researches. We collect MSCI firms from MSCI website, and GDR firms from Taiwan Securities Exchange Company (TSEC). Other related financial statement and stock performance variables are also from the TEJ database. To mitigate the influence of outliers, we winsorize all of the scaled independent variables included in our multivariate regression analysis (i.e., IFRS, ROE, Returns, Return variation, LEV, Div. yield, Book-to-market, E–P ratio, Sales growth, Turnover, Cash, and Closely held) at the top and bottom 1% of their distributions. The distribution of final sample on five renewed standard, its items inclusive, is prepared as follows. In Table 1, we can see inventory (S3) and share-based payment (S1) affect most companies. The financial assets reclassification (S2) and assets impairments standards (S4), have more items but fewer observations affected. See Appendix A for more information on these five standard variables. IFRS S1 S2 S3 S4 S5 All Table 1 Sample Distributions NI NW Affected Unaffected Total Affected Unaffected 1,360 451 5,698 291 712 6,970 8,849 9,758 4,511 9,918 9,497 3,239 10,209 10,209 10,209 10,209 10,209 10,209 2,057 370 1,938 156 1,259 4,479 8,152 9,839 8,271 10,053 8,950 5,730 Total Items 10,209 10,209 10,209 10,209 10,209 10,209 16 33 12 65 12 138 9 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 Table 2 Descriptive Statistics on Firm-Level Variables PANEL A Foreign holdings, percentage ownership Domestic holdings, percentage ownership Foreign holdings, Number of funds Domestic holdings, Number of funds Nanalyst NI Affected (N=6,970) NI Unaffected (N=3,239) NW Affected (N=4,479) NW Unaffected (N=5,730) Mean Median Median Std. Dev. Std. Dev Mean Median Median Std. Dev. Std. DevMean Median Median Std. Dev. Std. DevMean Median Median Std. Dev. Std. Dev 3.17 0.11 7.53 2.49 0.00 6.80 3.23 0.12 7.63 2.73 0.00 7.05 1.35 0.00 3.24 1.14 0.00 3.19 1.45 0.00 3.35 1.15 0.00 3.11 28.87 2.00 96.55 16.68 0.00 69.33 28.80 2.00 98.44 22.03 1.00 80.73 8.41 1.00 23.00 6.07 0.00 17.52 9.04 1.00 23.66 6.60 0.00 19.46 2.36 0.00 4.09 4.51 2.00 5.67 2.97 1.00 4.63 3.09 1.00 4.85 MSCI 0.10 0.00 0.56 0.10 0.00 0.30 0.11 0.00 0.31 0.10 0.00 0.60 Market 0.57 1.00 0.49 0.57 1.00 0.50 0.60 1.00 0.49 0.55 1.00 0.50 GDR 0.04 0.00 0.21 0.03 0.00 0.18 0.05 0.00 0.22 0.03 0.00 0.18 Big5 0.75 1.00 0.43 0.64 1.00 0.48 0.74 1.00 0.44 0.69 1.00 0.46 Size 8.07 7.93 1.54 8.05 7.92 1.55 8.17 8.02 1.58 7.98 7.85 1.52 ROE 0.03 0.06 0.20 0.04 0.08 0.23 0.03 0.07 0.20 0.03 0.07 0.22 Return 0.16 -0.02 0.74 0.17 0.05 0.58 0.20 -0.04 0.81 0.14 0.03 0.59 RetVar 0.12 0.11 0.06 0.12 0.11 0.06 0.13 0.12 0.06 0.12 0.10 0.06 LEV 0.37 0.35 0.19 0.40 0.39 0.20 0.37 0.35 0.19 0.39 0.37 0.19 DivYld 0.05 0.04 0.05 0.05 0.04 0.05 0.05 0.03 0.05 0.05 0.04 0.05 BM 0.90 0.79 0.52 0.81 0.71 0.48 0.87 0.74 0.53 0.87 0.79 0.49 EP -0.27 0.49 2.77 -0.28 0.58 2.98 -0.29 0.50 2.89 -0.26 0.53 2.80 SalesGrowth 0.02 0.00 0.33 0.06 0.05 0.32 0.04 0.01 0.34 0.03 0.02 0.31 Turnover 1.70 1.18 1.60 1.81 1.25 1.71 1.93 1.42 1.69 1.59 1.05 1.57 Cash 0.14 0.10 0.14 0.13 0.09 0.13 0.14 0.10 0.13 0.14 0.09 0.13 CloselyHeld 0.29 0.17 0.33 0.32 0.20 0.35 0.28 0.16 0.33 0.32 0.19 0.35 10 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 Table 2 Descriptive Statistics on Firm-Level VariablesβContinued PANEL B NI Affected (N=6,970) Mean NI Unaffected (N=3,239) Median Median Std. Dev. Std. DevMean NW Affected (N=4,479) Median Median Std. Dev. Std. DevMean NW Unaffected (N=5,730) Median Median Std. Dev. Std. DevMean Total NI 0.60 0.04 0.81 0.06 0.03 0.09 Total NW 0.18 0.00 0.20 0.03 0.02 0.03 NI 0.04 0.00 59.69 6.40 0.00 74.37 NW 0.04 0.00 45.81 5.63 0.00 57.05 ITEM 0.36 0.29 0.31 0.38 0.36 0.33 RECUR 0.76 1.00 0.56 0.68 1.00 0.46 NI 7.09 0.00 41.15 8.52 0.00 67.66 NW 4.19 0.00 10.08 7.31 0.00 29.89 ITEM 0.22 0.27 0.11 0.22 0.27 0.13 RECUR 0.91 1.00 0.85 0.79 1.00 0.48 NI 4.48 0.20 38.53 5.13 1.01 18.49 NW 1.97 0.00 27.84 3.07 0.00 34.68 ITEM 0.28 0.30 0.21 0.28 0.20 0.25 RECUR 0.73 1.00 0.58 0.63 1.00 0.49 NI 1.34 0.00 16.03 0.42 0.00 7.41 NW 0.19 0.00 5.37 1.13 0.00 18.88 ITEM 0.01 0.00 0.03 0.01 0.00 0.02 RECUR 0.03 0.00 0.09 0.04 0.00 0.10 NI 3.09 0.00 16.85 1.44 0.00 17.33 NW 8.26 0.00 68.01 17.31 0.00 18.60 ITEM 0.03 0.00 0.14 0.05 0.00 0.16 RECUR 0.01 0.00 0.03 0.01 0.00 0.04 S1= No.39-IFRS2 S2= No.34-IAS39 S3= No.10-IAS2 S4= No.35-IAS36 S5= No.36-IAS32 Median Median Std. Dev. Std. Dev 11 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 TABLE 3 Pearson/Spearman Correlation Coefficients among Firm-Specific Variables with Two-Tailed p-Values below (N=10,209 firm-years) Spearman \ Pearson (1) (2) (3) (4) Nanalyst MSCI Market GDR Big5 Size NI NW (1) Foreign holdings, percentage ownership 1 .685 .000 .162 .000 .435 .000 .037 .000 .072 .000 .103 .000 .086 .000 .093 .000 .088 .000 .033 .001 .060 .000 (2) Foreign holdings, Number of funds .944 .000 1 .093 .000 .605 .000 .025 .010 .068 .000 .112 .000 .099 .000 .079 .000 .103 .000 .044 .000 .105 .000 (3) Domestic holdings, percentage ownership .501 .000 .513 .000 1 .492 .000 .013 .192 .011 .283 .003 .758 .019 .060 .074 .000 .021 .034 .019 .055 .001 .958 (4) Domestic holdings, Number of funds .578 .000 .615 .000 .918 .000 1 .053 .000 .061 .000 .098 .000 .094 .000 .098 .000 .101 .000 .157 .000 .092 .000 Nanalyst -.002 .855 -.015 .142 .021 .032 .026 .008 1 .275 .000 .227 .000 .327 .000 .108 .000 .625 .000 -.033 .001 -.030 .002 MSCI .156 .000 .167 .000 .083 .000 .117 .000 .369 .000 1 .140 .000 .269 .000 .108 .000 .350 .000 -.011 .276 -.015 .124 Market .184 .000 .215 .000 .088 .000 .137 .000 .249 .000 .247 .000 1 .179 .000 .181 .000 .446 .000 -.008 .391 .010 .322 GDR .126 .000 .132 .000 .062 .000 .089 .000 .234 .000 .447 .000 .179 .000 1 .113 .000 .384 .000 -.011 .266 -.016 .099 Big5 .179 .000 .188 .000 .142 .000 .160 .000 .104 .000 .171 .000 .181 .000 .113 .000 1 .231 .000 .006 .551 .014 .167 Size .137 .000 .154 .000 .071 .000 .105 .000 .618 .000 .465 .000 .470 .000 .291 .000 .223 .000 1 -.069 .000 -.057 .000 NI .155 .000 .185 .000 .118 .000 .138 .000 -.349 .000 -.133 .000 -.090 .000 -.058 .000 .045 .000 -.254 .000 1 .265 .000 .089 .101 .103 .000 .000 .000 For definitions on other variables see Appendix B. .118 .000 -.087 .000 -.019 .049 .016 .110 -.002 .825 .039 .000 -.043 .000 .376 .000 1 NW 12 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 Table 2 presents descriptive statistics of the variables used in our analysis. Panel A reports firm-level descriptive statistics on foreign mutual fund ownership. We further reports firm-level and standard-level descriptive statistics on our itemization and recurrence measure in Panel B. The panel shows that for the sample firms affected, the firm-level mean and median foreign mutual fund ownership is much greater than domestic mutual fund ownership, while for the non-IFRS affected firms, their mean or median ownership is also much smaller than IFRS affected firms no matter than domestic or foreign mutual funds. The panel B shows that our itemized and recurring measures ranges from a low (representing less disclosure) of 3% in S5 to a high (representing more disclosure) of 38% in S1 for the sample firms NW affected. Panel B of Table 2 reports descriptive statistics on our itemization measure, which is used to create our standard-firms partition capturing increases in disclosure. The panel indicates that the itemization occurs in the NI affected and NW affected is no big difference. Panel B of Table 2 reports descriptive statistics for the firm-level and firm-level control variables used in our multivariate analysis, with the sample firms affected and the firms unaffected shown separately. The panel shows a reasonably high degree of variation in many of the variables. 3.2 Itemization and Recurrence We define accounting standards itemization for a firm as the ratio of related items contained in the cumulative effects to all items of the accounting standard. We capture itemization based on its differences because investment professionals intentionally use standard-oriented analysis as global comparing information. The accounts and items classification are based on the definitions of TEJ database (e.g., S1 has 16 items, S2=33, S3=12, S4=65, S5=12). We use the detailed calculation of TEJ database to capture the firms and standards included in our itemization measure. While a commonly espoused outcome of IFRS adoption is increased disclosure in view of management-orientation, there is little evidence on this issue regarding mandatory IFRS convergence. A potential alternative explanation for improved comparability is that they are caused by increased disclosure rather than by increased amounts and items of difference. Nevertheless, we still repeat our analysis because the extent of increased disclosures under IFRS is relatively proportional to the items and amounts of difference (Li, 2010), especially in a unique country. We measure recurring using the percentage of producing differences in standard level all the sample years following the test year, which is an outcome measure of its actual behavior. The percentage is computed as the average across measures of firm-level, with higher values indicating standard with relatively more recurring. Since this percentage is an output measure of the financial reporting system, it reflects all the reporting incentives faced by managers, including those provided by a highly rule of law and concentrated ownership. The notion that 13 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 underlies this measure is that less firm-level financial reporting recurrence result in poor predictive value of accounting standards, which in turn leads to less comparative financial reporting. Firms are classified as having highly recurrence based, and as having fully disclose on the sample firm-level median. 4. Empirical Results and Findings 4.1. Univariate Analysis Table 3 presents a univariate analysis comparing foreign mutual fund ownership, Pearson and Spearman correlation coefficients, for the associations among the firm-specific variables. The first eight rows of the table present the correlations between the mutual fund ownership measures (domestic and foreign holdings measured as percentage ownership and number of funds) and each of our independent variables. We find a significant positive correlation between both foreign mutual fund holding measures and IAS usage but mixed results for the domestic mutual fund holding measures. In addition, consistent with Covrig, Lau, and Ng [2006], we find that foreign mutual fund ownership levels are positively correlated with richer information environments (as captured by number of analysts and size) and higher visibility (as captured by major local and global index membership), at p<1% (two-tailed). In our untabulated result, we also find that foreign mutual fund ownership is positively correlated with cross-listing, Big 5 auditors, higher return on equity, higher stock returns, lower book-to-market ratios, and higher earnings-to-price ratios, at p<1% (two-tailed). Thus, the analysis in Table 3 suggests that, on average, mandatory IFRS convergence in the TAIWAN results in increased foreign mutual fund investment and that this increase is significantly larger than the increase in non-IFRS adopting firms during the same period. In the following section we examine this investment in a multivariate analysis. 4.2. Baseline Analysis To test the relation between foreign mutual fund holding and mandatory IFRS convergence, we estimate the following model by first using our sample period of on and post convergence, from 2005 to 2012. ( ) ( ) ( ) (1) ( ) Prior research (e.g., Karolyi and Stulz 2003) provides analytical evidence that investors that are mean-variance optimizers should hold the world market portfolio of common stocks. However, we follow Vientiu et al. (2007) who use two measures of foreign mutual fund holdings and domestic mutual fund holdings. One is the most commonly used proxy in the literature and equals the percentage ownership, that is total number of shares owned by the mutual funds divided by the total number of shares outstanding. The other measure is the natural logarithm of the number of mutual funds invested in the company, a measure that can provide additional insight on the size of the institutional 14 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 following. A comparative analysis of domestic mutual funds holding is included in our empirical test. Our hypothesis predicts the coefficient on IFRS to be positive when the dependent variable is foreign holdings. We also estimate the above model with domestic mutual fund holdings as the dependent variable, although we do not have a prediction for the sign of the coefficient on the IFRS dummy because it is unclear whether IFRS convergence adds significantly to the information set already available to domestic fund managers. We speculate that, compared to foreign investors, domestic investors are likely to have better access to alternative information channels and be more comfortable with local accounting standards. For example, domestic investors probably have easier direct access to managers and local analysts, possess greater knowledge of local economy and markets, and have a better understanding of alternative accounting methods allowed under local accounting standards. Thus, IFRS convergence may not result in significantly more useful information to domestic investors and therefore may have little impact on their investment decisions. What we are interested in are two variables and two measurements. Because a set of two-year comparative financial statement is required in Taiwan, it is a weighted average of prior year cumulative effects divided by market value of equity outstanding in the year-end before test year. We count two types of cumulative effects: One is NI(net income), on account of the increasing comparability function by time and amount, it weighs prior two-year difference by 1/3 and 2/3 on income accounts from five new standards used. The other is NW(net worth), it weighs the prior three-year difference by 1/6, 2/6 and 3/6, on asset-liability accounts. These two cumulative effects are accumulated respectively to the year-end before test year in order to observe its forward impact on change of investment. CONTROLs denotes a set of predetermined control variables that proxy for various firm level characteristics that have been linked in the prior literature to the foreign mutual fund holding. We set dummy variables, DINDUSTRY, capturing industry effects. It includes 23 industry groups by TSEC industry membership codes. Using DYEAR variables capturing year effects is because firm’s situation through 2008 global financial crisis is distinguishable. The other three model are expansion model from the baseline model. All about detailed definitions of all variables are provided as appendix B. 4.3. Cross-sectional Analysis We argue that the comparability of financial reporting is the function of time and amount. Intuitively, the time close to the decision-making point is most predictive. On the other hand, the largest amount is generally most decisive. However, every standard is pronounced or revised on its own date. What is the separate effect of a unique standard on foreign investment? We can test its convergence effect over their respective transfer years in contrast to the aggregated number of all differences in whole convergence period. We 15 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 transform the five unique standards set S1 to S5 as listed in appendix A into binary variables and respectively interact these binary variables with the amount of standard-level differences which is weighed as the aggregated difference in the empirical model (1). Based on argue that comparability function will be increasing by the time and the amount, we first weigh the amounts cross periods, and further we want to know the discriminate effect in a period. In order to examine whether the cumulative effect will be obviously increasing by the amount of standard-level differences, we first rank the amounts in a firm and then test the model again. Our hypothesis test examines whether mandatory IFRS convergence results in a greater increase in foreign mutual fund investment among firms in firms with highly recurring and with relatively more itemized. We are primarily interested in the role of recurrence and itemization among IFRS-NI affected firms. 16 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 Table 4 Baseline Regression of Foreign/Domestic Mutual Fund Ownership on IFRS and Control Variables π»ππΏπ·πΌππΊπ‘ π½ π½ (πΌπΉπ ππ‘ ) π½π (πΆππππ ππΏπ π‘ π ) π½π (π·πΌππ·ππππ ππ‘ π ) π½π (π·ππΈπ΄π π‘ π ) π (1) Dep. var. Test Variable: IFRS Percentage Ownership Foreign Holding Domestic Holding NI% NW% NI% NW% 0.034*** 0.052*** 0.021** 0.004 (0.001) (0.000) (0.036) (0.682) Number of Funds Foreign Holding Domestic Holding NI% NW% NI% NW% 0.043*** 0.092*** 0.157*** 0.090*** (0.000) (0.000) (0.000) (0.000) -0.001 (0.992) 0.030*** (0.004) 0.071*** (0.000) 0.059*** (0.000) 0.069*** (0.000) 0.004 (0.836) -0.008 (0.549) 0.008 (0.559) 0.006 (0.631) 0.001 (0.973) -0.002 (0.864) 0.006 (0.662) -0.015 (0.324) 0.017** (0.102) 0.070*** (0.000) 0.075*** (0.000) 0.044*** (0.000) 0.026 (0.187) -0.002 (0.890) 0.005*** (0.691) 0.000 (0.976) 0.003 (0.778) -0.005 (0.628) 0.012 (0.340) Firm-level controls: Nanalyst MSCI Market GDR Big5 Size ROE Return RetVar LEV DivYld BM -0.001 (0.969) 0.031*** (0.004) 0.070*** (0.000) 0.059 (0.000) 0.068** (0.061) 0.005 (0.820) -0.008 (0.546) 0.008 (0.570) 0.007** (0.590) 0.000 (0.980) -0.003 (0.975) 0.005 (0.712) -0.021** (0.178) 0.004*** (0.742) 0.002 (0.899) 0.016* (0.166) 0.063*** (0.000) -0.027** (0.176) -0.011 (0.396) -0.009 (0.499) -0.015* (0.227) -0.004 (0.766) -0.001 (0.937) -0.023* (0.075) -0.020* (0.192) 0.004 (0.732) 0.002 (0.874) 0.016** (0.162) 0.063*** (0.000) -0.029** (0.149) -0.011 (0.381) -0.009 (0.503) -0.015 (0.216) -0.004 (0.769) -0.002 (0.895) 0.023* (0.069) -0.014 (0.364) 0.018** (0.090) 0.068*** (0.000) 0.075*** (0.000) 0.041*** (0.000) 0.028* (0.150) -0.002 (0.900) 0.005 (0.717) 0.001 (0.916) 0.001 (0.940) -0.007 (0.537) 0.011 (0.393) -0.003 (0.852) 0.015* (0.151) 0.059*** (0.000) 0.063*** (0.000) 0.064 (0.000) 0.025* (0.199) -0.002*** (0.896) -0.005 (0.689) -0.009 (0.454) -0.003 (0.817) 0.007 (0.577) -0.010*** (0.375) 0.002 (0.895) 0.016* (0.123) 0.060*** (0.000) 0.064*** (0.000) 0.065*** (0.000) 0.015 (0.433) -0.004 (0.758) -0.005 (0.703) -0.010 (0.405) 0.005 (0.665) -0.015 (0.193) -0.007*** (0.579) 17 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 Table 4 Baseline Regression of Foreign/Domestic Mutual Fund Ownership on IFRS and Control Variablesβ Continued π»ππΏπ·πΌππΊπ‘ π½ π½ (πΌπΉπ ππ‘ ) π½π (πΆππππ ππΏπ π‘ π ) π½π (π·πΌππ·ππππ ππ‘ π ) π½π (π·ππΈπ΄π π‘ π ) π (1) Dep. var. Percentage Ownership Foreign Holding Domestic Holding NI% NW% NI% NW% -0.017* -0.016 0.024** 0.024** (0.183) (0.199) (0.060) (0.062) -0.015 -0.015 0.004 0.004 (0.169) (0.159) (0.731) (0.742) -0.002 -0.003 0.019 0.019* (0.839) (0.802) (0.111) (0.115) -0.009 -0.009 -0.002 -0.002* (0.414) (0.409) (0.842) (0.839) -0.001 -0.003 -0.033** -0.033** (0.940) (0.812) (0.014) (0.014) Number of Funds Foreign Holding Domestic Holding NI% NW% NI NW -0.018 -0.017 -0.003 0.001 (0.139) (0.167) (0.801) (0.946) -0.012 -0.012 0.001 -0.006 (0.283) (0.259) (0.922) (0.587) 0.006 0.005*** 0.013 0.012 (0.623) (0.680) (0.251) (0.327) -0.020** -0.020** -0.012 -0.013 (0.072) (0.069) (0.267) (0.254) 0.012 0.008 0.003 0.000 (0.347) (0.531) (0.812) (0.994) DIndustry YES YES YES YES YES YES YES YES DYear YES YES YES YES YES YES YES YES 0.041 0.040 0.010 0.010 0.065 0.071 0.072 0.056 10,209 10,209 10,209 10,209 10,209 10,209 10,209 10,209 Test Variable EP SalesGrowth Turnover Cash CloselyHeld Adj. R N 2 Variable definitions: Foreign mutual fund ownership: Total number of shares owned by foreign mutual funds divided by shares outstanding at year-end. Foreign mutual funds are those funds whose domicile is different from the country of their investees. Domestic mutual fund ownership: Total number of shares owned by domestic mutual funds divided by shares outstanding at yearend. Domestic mutual funds are those funds whose domicile is the same as the country of their investees. See Appendix B for definitions on other variables. a. Two-tailed p-values based on robust standard errors clustered by firm in parentheses.***, **, *indicates significance at the 0.01, 0.05, and 0.10 level or better, respectively. 18 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 In table 5 panel A, we find that S1 is the most important to foreign and domestic investor, and S3 is significant to investor following but it seem to negatively affect the intention to increase the stock holding. Overall, from S2 to S5 it seems to be very inconsistently significant to investor that we can know there is no preference for investor to choose the stock with comparability benefit. The explanation should lead to further studies about the preference of different types of investors. In table 5 panel B, we find that R1 is the most important to foreign and domestic investor, R2 and R3 is average significant to investor following but it seem to negatively affect the intention of domestic investors to increase the stock holding. Overall, from R1 it seems to be very consistently significant to investor that we can know there is a preference for investor to choose the stock with most comparability benefit. 4.4. Multivariate (Attribute) Analysis Based on the analysis of attribute of IFRS-based standard, we test our hypothesis by regressing foreign mutual fund holdings on three dummy variables (and their interactions) indicating: (1) whether there is a key amount of differences (R1), (2) whether the firms has highly recurring difference, and (3) whether IFRS convergence results in more items of difference, and a set of control variables as listed in Appendix A. Our hypothesis predicts that the coefficient π½7 is positive. This coefficient equals the incremental foreign mutual fund ownership after 2005 for mandatory firms affected that experience larger itemization in highly recurring firms, relative to the weak recurring firms. Panel A shows that this coefficient equals 0.006 and is insignificant at pr1%. However, IFRS*RECUR ( π½5 ) indicates that the increase in foreign mutual fund holdings by indicator is about 24% larger among firms that experience with highly recurring, when compared to firms in firms with weak recurring. That’s could be the most meaningful finding we have. The Interaction of The amount of cumulative effect and expected future recurrence effect obviously exceeds other situations. To better understand the interpretation of the coefficients in Panel A, Panel B of Table 6 reconstructs the coefficients for each of the four categories of firms in our sample (Untabulated). The four categories are based on whether the firms are in firms with highly recurring and whether the firms experience a large increase in itemization. The bottom two rows of Panel B report the results for firms in firms with highly recurring. The bottom row shows that the ownership for the firms in firms with highly recurring that experience large increases. 19 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 Table 5 Cross-sectional Analysis Regression of the Change in Foreign/Domestic Mutual Fund Ownership on IFRS and Control Variables π»ππΏπ·πΌππΊπ‘ π½ π½ (πΌπΉπ ππ‘ ) π½π (πΆππππ ππΏπ π‘ π ) π½π (π·πΌππ·ππππ ππ‘ π ) π½π (π·ππΈπ΄π π‘ π ) π (2) Panel A Partition the cumulative effects by standards Dep. var. Percentage Ownership Foreign Holding Domestic Holding NI NW NI NW 0.079*** 0.054*** 0.078*** 0.050*** (0.000) (0.000) (0.000) (0.000) 0.010 -0.005 -0.010 -0.011 (0.413) (0.682) (0.400) (0.339) -0.035** 0.034*** -0.038** -0.004 (0.071) (0.004) (0.055) (0.760) 0.005 0.030*** -0.025 -0.004 (0.706) (0.011) (0.065) (0.743) 0.010 0.042*** -0.007 -0.004 (0.531) (0.000) (0.669) (0.741) Number of Funds Foreign Holding Domestic Holding NI NW NI NW 0.065*** 0.060*** 0.195*** 0.220*** (0.001) (0.000) (0.000) (0.000) 0.010 0.005 0.008 0.006*** (0.374) (0.861) (0.495) (0.000) -0.010 0.100*** 0.021** 0.067*** (0.591) (0.000) (0.269) (0.000) 0.016** 0.008 0.015** 0.001 (0.223) (0.487) (0.231) (0.920) 0.023** 0.080*** 0.002 0.032*** (0.158) (0.000) (0.896) (0.006) Firm-level controls YES YES YES YES YES YES YES YES DIndustry YES YES YES YES YES YES YES YES DYear YES YES YES YES YES YES YES YES 0.043 0.047 0.015 0.014 0.065 0.081 0.080 0.089 6,970 4,479 6,970 4,479 6,970 4,479 6,970 4,479 Test Variable S1(No.39-IFRS2) S2(No.36-IAS39) S3(No.10-IAS2) S4(No.35-IAS36) S5(No.36-IAS32) Adj. R N 2 Variable definitions: Foreign mutual fund ownership: Total number of shares owned by foreign mutual funds divided by shares outstanding at year-end. Foreign mutual funds are those funds whose domicile is different from the country of their investees. Domestic mutual fund ownership: Total number of shares owned by domestic mutual funds divided by shares outstanding at yearend. Domestic mutual funds are those funds whose domicile is the same as the country of their investees. See Appendix B for definitions on other variables. a. Two-tailed p-values based on robust standard errors clustered by firm in parentheses.***, **, *indicates significance at the 0.01, 0.05, and 0.10 level or better, respectively. 20 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 Table 5 Cross-sectional Analysis Regression of the Change in Foreign/Domestic Mutual Fund Ownership on IFRS and Control Variables π»ππΏπ·πΌππΊπ‘ π½ π½ (πΌπΉπ ππ‘ ) π½π (πΆππππ ππΏπ π‘ π ) π½π (π·πΌππ·ππππ ππ‘ π ) π½π (π·ππΈπ΄π π‘ π ) π (2) Panel B Partition the cumulative effects by amounts ranking Dep. var. Percentage Ownership Foreign Holding Domestic Holding NI NW NI NW 0.015* 0.075*** -0.035** -0.002 (0.533) (0.000) (0.153) (0.889) 0.018* -0.007 0.061*** 0.024** (0.463) (0.681) (0.007) (0.141) 0.038*** 0.021** -0.008 -0.009 (0.002) (0.173) (0.538) (0.563) Number of Funds Foreign Holding Domestic Holding NI NW NI NW 0.134*** 0.131*** 0.095*** 0.104*** (0.000) (0.000) (0.000) (0.000) -0.006 -0.004 0.096*** 0.090*** (0.707) (0.833) (0.000) (0.000) 0.019** 0.032** 0.007 -0.006 (0.216) (0.082) (0.585) (0.681) Firm-level controls YES YES YES YES YES YES YES YES DIndustry YES YES YES YES YES YES YES YES DYear YES YES YES YES YES YES YES YES 0.043 0.054 0.014 0.017 0.070 0.070 0.069 0.060 6,970 4,479 6,970 4,479 6,970 4,479 6,970 4,479 Test Variable RANK1 RANK2 RANK3 Adj. R N 2 Variable definitions: Foreign mutual fund ownership: Total number of shares owned by foreign mutual funds divided by shares outstanding at year-end. Foreign mutual funds are those funds whose domicile is different from the country of their investees. Domestic mutual fund ownership: Total number of shares owned by domestic mutual funds divided by shares outstanding at yearend. Domestic mutual funds are those funds whose domicile is the same as the country of their investees. See Appendix B for definitions on other variables. a. Two-tailed p-values based on robust standard errors clustered by firm in parentheses.***, **, *indicates significance at the 0.01, 0.05, and 0.10 level or better, respectively. 21 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 Table 6 Attributes Analysis Regression of the Foreign Mutual Fund Ownership Ownership/Number— NI Cumulative Effects of Firm Level π»ππΏπ·πΌππΊπ‘ π½ π΄π½ (πΌπΉπ ππ‘ ) π΄π½2 (π πΈπΆππ π‘ ) π΄π½3 (πΌππΈππ‘ ) π΄π½4 (πΌππΈππ‘ ) ∗ (π πΈπΆππ π‘ ) π΄π½5 (πΌπΉπ ππ‘ ) ∗ (π πΈπΆππ π‘ ) π΄π½7 (πΌπΉπ ππ‘ ) ∗ (π πΈπΆππ π‘ ) ∗ (πΌππΈππ‘ ) π½π (πΆππππ ππΏπ π‘ π ) π½π (π·πΌππ·ππππ ππ‘ π ) π½π (π·ππΈπ΄π π‘ π ) π Dep. Var. Test Variable Foreign 0.038** IFRS (0.052) 0.362*** RECUR (0.000) 0.240*** ITEM (0.000) 0.031* ITEM*RECUR (0.180) 0.013 IFRS*RECUR (0.518) 0.059* IFRS*ITEM (0.318) 0.006 IFRS*RECUR*ITEM (0.738) Percentage Ownership Level Domestic Foreign 0.048** 0.024* (0.014) (0.150) 0.365*** 0.571*** (0.000) (0.000) 0.239*** 0.081 (0.000) (0.000) 0.019* 0.039*** (0.109) (0.020) 0.011 0.239*** (0.609) (0.000) 0.059* -0.055 (0.319) (0.275) 0.006 -0.038** (0.724) (0.011) Indicator Domestic 0.038** (0.021) 0.574*** (0.000) 0.080*** (0.000) 0.036*** (0.010) 0.236*** (0.000) -0.054* (0.277) -0.037** (0.011) Foreign 0.014 (0.431) 0.354*** (0.000) 0.244*** (0.000) 0.013** (0.063) 0.015 (0.463) 0.060 (0.316) 0.005 (0.797) π΄π½6 (πΌπΉπ ππ‘ ) ∗ (πΌππΈππ‘ ) (3) Number of Funds Level Domestic Foreign -0.020 -0.005 (0.276) (0.751) 0.354*** 0.566*** (0.000 (0.000) 0.245*** 0.084*** (0.000) (0.000) 0.016** 0.040*** (0.043) (0.000) 0.016 0.240*** (0.443) (0.000) 0.057 -0.056 (0.337) (0.264) 0.005 -0.038** (0.767) (0.010) Indicator Domestic -0.005 (0.760) 0.567*** (0.000) 0.083*** (0.000) 0.039*** (0.000) 0.239*** (0.000) -0.057 (0.258) -0.038** (0.011) Industry indicators YES YES YES YES YES YES YES YES Year indicators YES YES YES YES YES YES YES YES 0.043 0.054 0.014 0.017 0.070 0.070 0.069 0.060 6,970 6,970 6,970 6,970 6,970 6,970 6,970 6,970 Adj. R N 2 Variable definitions: Foreign mutual fund ownership: Total number of shares owned by foreign mutual funds divided by shares outstanding at year-end. Foreign mutual funds are those funds whose domicile is different from the country of their investees. Domestic mutual fund ownership: Total number of shares owned by domestic mutual funds divided by shares outstanding at yearend. Domestic mutual funds are those funds whose domicile is the same as the country of their investees. See Appendix B for definitions on other variables. a. Two-tailed p-values based on robust standard errors clustered by firm in parentheses.***, **, *indicates significance at the 0.01, 0.05, and 0.10 level or better. 22 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 5. Conclusion The purpose of this study is to test whether foreign investors are differentially attracted to companies that mandatorily converge into IFRS. Using foreign mutual fund ownership as a proxy for foreign investor preferences, we hypothesize that firms with larger difference have a larger proportion of stock ownership by foreign mutual funds. Results from our multivariate analysis support our hypothesis by finding that foreign mutual fund ownership is higher among firms affected by IFRS-based standard compared to firms using local accounting standards. This study further examines the effect of adopting a unique accounting standard on comparability and cross-border investment. While we expect improved comparability to result in increased cross-border investment, we predict that mandatory IFRS convergence will lead to improved comparability only when there is a better basis on predictive value. Consistent with our prediction, we find that mandatory IFRS convergence results in a greater increase in foreign investment among companies with more disclosure and higher probability of recurrence in future. Although we find that not every standard with these two attributes have a significant increase in foreign mutual fund ownership, some effective result will be deductive on future extension. Additional analysis shows that the improved comparability associated with mandatory IFRS convergence does not increase domestic mutual fund ownership, consistent with domestic investors being more familiar with local accounting standards. Moreover, the inferences drawn from the evidence provided in this study are useful to regulators, especially when confronted with the proposed adoption of IFRS with local GAAP. For example, FASB in the U.S. has supported the development of high quality, global accounting standards since at least 1999. 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World development indicators database. Available at: http://www.worldbank.org Yu, G. 2010.Accounting Standards and International Portfolio Holdings: Analysis of Cross Border Holdings following Mandatory Adoption of IFRS. Working paper, University of Michigan. 25 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 Appendix Appendix A: New IFRS-based standards in Taiwan from 2005 to 2008. No. Title of Taiwan financial Accounting Standard IFRS Revision Date 05 10 34 Dec. 22, 2005 Nov. 29, 2007 Sep. 22, 2005, Oct. 17, 2008 Dec.4, 2008 Nov. 30, 2006 June 23, 2005 35 36 Long-term Investments under Equity Method IAS 39 Inventories (S3) IAS 2 Financial Instruments: Recognition and IAS 39 Measurement (S5) Impairment of Assets IAS 38 Financial Instruments: Disclosure and IAS 32 Presentation (S2) 37 Intangible Assets IAS 38 July 20, 2006 38 Non-current Assets Held for Sale and IFRS 5 Nov. 30, 2006 Discontinued Operations 39 Share-based payment (S1) IFRS 2 Aug. 23, 2007 Taiwan’s Financial Accounting Standard No.5, 34, 35, 37, and 38 are integrated into a so-called ‘Financial Impairments Model’ in TEJ database. It is our cross-section independence variable S4. 26 Proceedings of 23rd International Business Research Conference 18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8 Appendix B: Variable Definitions B1. Variables of interest Holdings: percentage ownership of mutual funds or the number of mutual funds. The percentage ownership is computed as the total number of shares owned by the mutual funds divided by the total number of shares outstanding at year-end. Foreign/Domestic mutual fund ownership equals total number of shares owned by foreign (domestic) mutual funds divided by common shares outstanding at year-end. Foreign/Domestic mutual funds following equals total number of foreign (domestic) mutual funds make investments in the company at year-end. IFRS: Aggregate amount of all (separate) differences between old local standard and new-IFRS based one as a proportion of the market value of equity in millions at prior year-end. It is counted into NI and NW. NI (NM) denotes IFRS net income (Net Assets) cumulative effects. Item: Aggregate items of separate difference between old local standard and new-IFRS based one, divided by total items number. Recur: Aggregate times of separate difference between old local standard and new-IFRS based one, divided by total years after the test year to 2012. Post: Indicator variable equal to one if a firm-year falls in or after 2009 B2. Firm-level controls: Nanalyst: Number of securities firm analysts following the company at year-end. Size: Natural logarithm of the market value of equity in millions at year-end. MSCI: Indicator variable equal to one if a company is included in MSCI World Index at lead year-end. Market: Indicator variable equal to one if a company is included in TSE Index. GDR: Indicator variable equal to one if a company is listed in the Global Depository Receipt at lead year-end listed in TSEC website. Big5: Indicator variable equal to one if a company is audited by a Big 5 audit firm at year-end. ROE: Net income before extraordinary items divided by book value of equity at year-end. Ret: Stock returns over the fiscal year. RetVar: Standard deviation of monthly stock returns over the fiscal year. LEV: Total liabilities divided by total assets at year-end. DivYld: Total dividends divided by market value of equity at year-end. BM: Book value of equity divided by market value of equity at year-end. EP ratio: Net income divided by market value of equity at year-end. SalesGrowth: Annual growth rate in net sales over the fiscal year. Turnover: Annual share volume divided by shares outstanding over the fiscal year. Cash: Ratio of cash and short-term investment to total assets at year-end. CloselyHeld: Number of shares outstanding held by members of board of directors and presidents or executives in a corporate as a proportion of the number of common shares outstanding at year-end. B3. Others: DIndustry: Indicator variables indicating industry membership based on 23 industry codes of TSEC. DYear: Indicator variables for Year. 27